FL: Solid Update for Top Long

Takeaway: One of our top longs, FL’s sales are tracking ahead of plan and the setup is increasingly favorable into year-end

As a follow up to FL’s recent 3Q results, we think a reacceleration in athletic footwear industry sales after a slow start to November and a favorable near-term setup suggest a strong finish into year-end. We are also positive on FINL and NKE, which is another top long idea.

Consider the following on a TRADE basis (3-weeks or Less):

  • Athletic footwear sales have come in up +5.3% over the last two weeks after coming in down -6% in the first two weeks of November accelerating sequentially each of the last 3-weeks.
  • As seen in the chart below, continued underperformance in the other channels cause weekly sales to significantly understate performance in the Athletic Specialty channel (i.e. FL, FINL, DKS, etc.).
  • Basketball continues to be a significant driver with trailing 3-week domestic sales accelerating sharply higher +27% from +15% over each of the prior four weeks.
  • With FL reporting comps up +MSD through the first half of November despite the industry down -6% and sales over the last two weeks running +5%, we believe FL comps are tracking well ahead of the “upper end of mid-single digit” comp plan.
  • With a favorable setup through year-end and shift towards basketball in Europe, we expect more opportunity for further upside in performance.
  • Retailer sales gains over the holiday weekend were heavily reliant on deep promotional activity. We think athletic footwear retailers (FL/FINL) were substantially less impacted and benefitted from more full-priced sell through with several new launches hitting over the holiday week. Moreover, while several apparel and home furnishing retailers offered free shipping on certain items for the first time, there was no incremental hit to footwear retailer margins as free shipping has become standard.


The longer-term TREND (3-Months or More) & TAIL (3-Year or Less) call:

  • Still in the early stages of its turnaround, FL is not solely reliant on the ‘footwear cycle’ for growth.
  • A return to new store growth for the first time in over 6-years will augment comps benefitting from higher growth and higher margin businesses (i.e. Women’s, Apparel, and Kids).
  • After a decade of inventories outpacing sales growth and contracting margins under Matt Serra, FL has posted positive sales/inventory growth and margins expansion over the last three years under Ken Hicks.
  • We’re see more opportunity for upside performance over the intermediate-term and are looking at $3 in earnings power next year approaching $3.50 in F14.

FL: Solid Update for Top Long - FW App Table

Source: NPD Weekly POS Data


FL: Solid Update for Top Long - FW 1YR


FL: Solid Update for Top Long - FW Cat


FL: Solid Update for Top Long - FW Channl




One theme we will be highlighting on Thursday’s call is Return on Incremental Invested Capital.  Yum! Brands has proven itself reliable when it comes to generating returns.


Setting Expectations


YUM’s management team is set to present at the company’s annual Investor & Analyst Conference in New York on December 6th.  Our conference call with clients, on November 29th, will outline our thoughts on the outlook for 2013 and what we expect management to focus on the following week. Please contact for access to our call on Thursday, November 29th, at 1:30pm.



Diversifying Growth


We expect the company to emphasize YUM’s increasing geographic diversification during the Investor & Analyst Conference.  The case will be made that increasing the deployment of capital to emerging markets within the YRI division will generate higher incremental returns on capital than the overall enterprise currently produces. 


We believe that ROIIC (chart below) is an important metric for restaurant companies focused on growth and expect YUM’s strong share price performance to continue throughout 2013. 



YUM CALL PREVIEW - yum roiic



Howard Penney

Managing Director


Rory Green


Changes In Housing

For the last five years, the housing market has been a headwind for many banks, including regional player TCF Financial (TCB). The recession’s impact in the midwest affected the company greatly as borrowers lost jobs and dealt with falling home prices. These days, the outlook is improving as the worst is over with in terms of the housing bubble. Housing prices in markets like Denver and Phoenix are rising and will strengthen TCF. The stock remains one of our favorite long positions for all three durations: TRADE, TREND and TAIL.


Changes In Housing - image003

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Energy Capex Growth

Compared to other industries that are part of the S&P 500, energy takes the lead for the amount of dollars spent in terms of capital expenditures. In 2012, energy companies in the S&P500 will spend 38% of all S&P500 capex; this compares to just 12% in 1999 and 2000.  Oilfield service and equipment companies are the least capital intensive and include names like Dril-Quip (DRQ), National Oilwell Varco (NOV) and Core Laboratories (CLB). 


While we expect a slight tick down in capex for the energy sector in 2013, between 1996 and 2012, nominal capex for the S&P500 increased 108%; nominal capex for the energy sector increased 472% over the same time period.  Energy accounted for 61% of total S&P500 capex growth from ’96 – ‘12, while utilities was second at 20% of the growth.


Energy Capex Growth - 1 normal

Cheat 'Em

Client Talking Points

Three-Card Monte

The market can sometimes feel like  a guy with a cardboard table, hidden in an alleyway with some playing cards and the odds stacked against you. Yesterday, the US equity market rallied on “Greek” news and then promptly did an about-face and proceeded to sink lower along with European and Chinese equity markets. A lot of investors probably feel cheated, especially those who though that China had “totally bottomed.” Remember: cheap can always get cheaper. Stocks can always go lower. #GrowthSlowing continues in full force.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“‘China has bottomed’ bulls, very quiet” -@KeithMcCullough


“Bore, n.: A person who talks when you wish him to listen.” -Ambrose Bierce


ConAgra to Buy Ralcorp Holdings for $5 billion.

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